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FIN 313 study guide

by: Cassidy Spencer

FIN 313 study guide 313

Cassidy Spencer
Bloomsburg University of Pennsylvania

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FIN 313 study guide
Intro to Corporate Finance
Victoria Geyfman
Study Guide
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This 5 page Study Guide was uploaded by Cassidy Spencer on Monday March 28, 2016. The Study Guide belongs to 313 at Bloomsburg University of Pennsylvania taught by Victoria Geyfman in Spring 2016. Since its upload, it has received 21 views. For similar materials see Intro to Corporate Finance in Finance at Bloomsburg University of Pennsylvania.

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Date Created: 03/28/16
Finance Exam 2 FIN 313 Professor: Geyfman 1. The standard deviation measures the ______ of a security’s returns over time  Volatility 2. ______ can be achieved by investing in a set of securities that have different risk-return characteristics.  Diversitifaction 3. Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the rate of return on Phoenix stock one year from now Rate of Return Probability -20% 0.25 0% 0.30 +20% 0.25 +40% 0.20 Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.  8% 4. The lowers the standard deviation of returns on a security, the ____ the expected rate of return and the _____ the risk  Lower; lower 5. The most relevant risk that must be considered for any widely traded individual security is its ______.  Systematic Risk 6. Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm  Bonds, Preferred Stock, Common Stock 7. You earned 26.3 percent on your investments for a time period when the inflation rate was 3.1 percent. What was your real rate of return?  22.5% 8. The call feature is an advantage to the issuing firm:  If interest rates decline 9. The value of a 15-year bond will change _____ for a given change in the required rate of return then the value of a 5-year bond.  More 10. If an American Water Company bond has a coupon rate of 9.0 percent and is selling for $920, then the yield to maturity must be:  Greater than 9% 11. City of Baltimore sold at par a $1,000 bond with a coupon rate of 8% and 20 years to maturity. If this bond pays interest semiannually , what is the value of this bond to an investor who requires an 8 percent rate of return?  $1,000 12. WPI has a bond issue outstanding that has a coupon rate of 10%, and a yield to maturity of 12%. What is the market price of the WPI bond if it pays interest semi-annually and has 10 years to maturity?  $885.30 13. The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share of this preferred stock if you require a 15 percent rate of return?  $8.33 14. Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of stock of Fast Wheels to an investor who requires a 14 percent rate of return?  $9.00 15. The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividends to be $0.20 per share. What is the total rate of return on this stock?  9.85 percent 16. What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if HOV’s current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound annual rate of 7 percent.  $25.68 17. Beta is defined as:  The measure of volatility of a security's returns relative to the returns of a broad- based market portfolio of securities 18. Portfolio diversification eliminates which of the following?  Unsystematic Risk 19. Phoenix Company common stock has a Beta of 1.5. The risk-free rate is 5 percent and the expected market rate of return is 14 percent. Determine the require rate of return on the security.  18.5% 20. Assume you want to construct a portfolio with a 14 percent return from the following 2 securities Security Expected Return Beta 1 16% 1.12 2 12.5% 0.94  43% 21. Jim Bowles is an investor who believes the economy is gaining strength and therefore, wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000 and the current beta of the portfolio is 1.02 The beta of the least risky security is .76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?  1.07 22. Kermit Industries current common stock dividend is $1.35 per share and the dividend is expected to grow at 6% per year into the foreseeable future. Currently the risk-free rate is 4.5% and the estimated market risk premium is 8.5%. Merrill Lynch has estimated KI's beta to be 1.10. Compute the expected price for KI's common stock.  $18.23 23. Which of the following statements regarding is/are correct? I. A portfolio of two negatively correlated assets has less risk than either of the individual assets because risk could be further reduced to 0 or below II. There is no case where creating a portfolio of assets will result in greater risk than that of the riskiest asset included in the portfolio  I only 24. Two years ago, Trans-Atlantic Airlines sold $250 million worth of bonds at $1,000 each. The bonds had a maturity of 12 years and a coupon rate of 12%. Today these bonds are selling for $910. Determine the yield- to-maturity (to the nearest tenth of one percent).  13.6% 25. What is the current value of Bandag Inc. to an investor who has a required rate of return of 12 percent? The current dividend is $1.00 and the dividends are expected to grow 8 percent per year for 3 years. At the end of 3 years the investor expects to sell the security for $76.  $56.90


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